A Tale of Two Sectors: Why is Misallocation Higher in Services than in Manufacturing?
November 15, 2016
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Summary
Recent empirical studies document that the level of resource misallocation in the service sector is significantly higher than in the manufacturing sector. We quantify the importance of this difference and study its sources. Conservative estimates for Portugal (2008) show that closing this gap, by reducing misallocation in the service sector to manufacturing levels, would boost aggregate gross output by around 12 percent and aggregate value added by around 31 percent. Differences in the effect and size of productivity shocks explain most of the gap in misallocation between manufacturing and services, while the remainder is explained by differences in firm productivity and age distribution. We interpret these results as stemming mainly from higher output price rigidity, greater labor adjustment costs and more informality in the service sector.
Subject: Economic sectors, Labor, Manufacturing, Production, Productivity, Services sector, Total factor productivity
Keywords: balance-sheet data, efficiency gain, factor share, firm-level data, Gelbach decomposition, industry classification, industry level, Manufacturing, manufacturing sector industry, Misallocation, ol tne, output price rigidity, output wedge, productivity, productivity distribution, productivity shock, service sector, Services sector, structural transformation, TFP distribution, Total factor productivity, WP
Pages:
50
Volume:
2016
DOI:
Issue:
220
Series:
Working Paper No. 2016/220
Stock No:
WPIEA2016220
ISBN:
9781475553796
ISSN:
1018-5941
